Criminal Justice

Bond Rating Firms, Criticized in Subprime Crisis, Near Deal on Reform

The top bond ratings firms are close to an agreement with the New York attorney general that would change the way they collect fees to grade securitized subprime mortgages and other bonds.

The firms affected would be Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, report the New York Times and the Wall Street Journal (sub. req.). Bond ratings firms have been accused of giving top ratings to risky mortgage products that resulted in investor losses. Critics say the firms faced conflicts of interest because they were paid by entities seeking a good rating.

The agreement with Attorney General Andrew Cuomo would change the fee structure when multiple firms conduct reviews of the same product. Currently firms participating in a review may not get paid if they aren’t hired to issue a rating. Under the new proposal, all the firms would get fees for analytical tasks even if they don’t issue a rating.

The firms would also be required to disclose all deals they were asked to rate so investors can spot instances where firms may have competed for rating business. The agencies also would cooperate with Cuomo’s investigation into investment banks issuing troubled mortgage-backed securities.

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